Measuring Inflation

Determining inflation is important, but tricky. If you look a little further back in time, you’d notice that inflation was not always this calm, say in 1980 it peaked at 14%.

There are two ways to determine it:

1.

Use the Consumer Price Index (CPI) to see what the average inflation rate has been over time. However, the CPI is not perfect, and its version used most often ( core CPI) excludes things like food and energy from its calculation because they are “volatile”. So, option 2 is much more adequate, but requires more work. Raw data available from Federal reserve bank of St.Louis (Figure 2.1).

2.

Look at your own expenses over several years to extrapolate a median inflation rate (use the median to reduce the influence of any given outlier year).

Inflation has averaged about 3.2% annually for the last century, so it could make more sense to go with that number instead.